Catastrophic Risk and Credit Markets

  • Author(s): MARK J. GARMAISE, TOBIAS J. MOSKOWITZ
  • Published: Mar 13, 2009
  • Pages: 657-707
  • DOI: 10.1111/j.1540-6261.2009.01446.x

ABSTRACT

We provide a model of the effects of catastrophic risk on real estate financing and prices and demonstrate that insurance market imperfections can restrict the supply of credit for catastrophe‐susceptible properties. Using unique micro‐level data, we find that earthquake risk decreased commercial real estate bank loan provision by 22% in California properties in the 1990s, with more severe effects in African–American neighborhoods. We show that the 1994 Northridge earthquake had only a short‐term disruptive effect. Our basic findings are confirmed for hurricane risk, and our model and empirical work have implications for terrorism and political perils.

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